The big market story this week has been the disconnect between the action in the indices and the action in the great bulk of individual stocks.
A small group of large-capitalization stocks has painted a rosy picture for the indices that are hovering at all-time highs, while many growth, small-caps, and speculative stocks are acting like they are trapped in an ugly bear market. Even the meme stocks have succumbed to the selling pressure this week.
There have been ongoing shifts between value and growth as well as close-the-economy and reopen-the-economy stocks all year. That is part of what is going on, but primarily there are just dramatic flows of liquidity into the "safe harbor" of big-cap names.
There are two issues that are helping to support big-caps. The first is that names such as Apple (AAPL) and Microsoft (MSFT) are viewed as being less sensitive to interest rates. The companies are sitting on great piles of cash, and their sales and pricing will likely benefit from inflation.
The second issue helping big-caps right now is the surge in COVID variants. Countries like Singapore and Japan are putting restrictions back in place. Investors are very aware of which stocks did best during the COVID crisis in 2020, and they are returning to those names.
The business media have done a very poor job of describing what is going on in the market lately. For the popular media, the DJIA is the market, and it does not matter if under the surface the great majority of stocks are declining if the DJIA or S&P 500 is positive. All those smaller stocks just aren't on their radar.
This distortion of the overall market picture has an impact on market sentiment and is part of the reason it is difficult for some beaten-down stocks to find support. There isn't any widespread recognition of bear market action, and that prevents widespread capitulatory activity.
The primary issue for traders right now is whether the stocks that have been hit hardest can bounce back, or do the bigger cap names have to correct more first? There was some minor corrective action in the FATMAAN stocks on Thursday, but the gulf between some growth names and big-caps is as severe as it has ever been.
My game plan is to continue to closely monitor the smaller stocks that I favor but not rush in to buy them until there is some shift in the disconnect between the indices and breadth. We need some correlated movement rather than rotation to change the character of this market.
We have a minor positive open on the way as financial TV celebrates the new all-time highs in a very small group of big-cap stocks.